How to explain investments to kids

When you put money in, hoping to get more money back, that's investing. You can invest in a lot of different things too! Businesses, land, trading cards, gems, weird digital monkey photos — almost anything. But the key to investing is patience and discipline. Just like we don't expect a new and tiny tree to grow fruit right away, we shouldn't expect our investments to bear fruit immediately either. It takes time and depends on the sun, rain, and other conditions to make a plant grow strong. 

The same goes for money and your investments. There might be years with lots of growth, there might be years that things look like they aren't changing, there may even be years where your investments are not doing so well either.

Investments are like seeds. You can plant it, and over time it can grow roots, get taller, and hopefully produce yummy and delicious fruit one day. Starting young gives you more time to reap the rewards of your investment. (More years of growth and more chances for a great harvest.) By investing for your child when they're young, the odds of growth start to stack in their favor — but it's never guaranteed.

Takeaway

Being patient and disciplined gives your investments time to grow and hopefully will lead to profits down the road. If you pay attention to your portfolio, diversify, and stay in touch with your financial advisor. In that case, you're doing a pretty good job.

Refreshers

• Stocks
• Bonds
• ETFs

Stocks

A stock is a little piece of a much bigger company. Imagine that a company is a castle made out of Legos. A stock is like one Lego piece in that castle: When you buy the stock, you own that piece of the company. 

Bonds

A bond is like an "I owe you" (IOU) from a company or government that can be traded on the market. When a company needs money, it can sell bonds to people like you and me. They "borrow" this money from you, hoping that your investment can help grow the company. You make money if they pay you back with interest over time. The interest rate on each bond is different. More risky bonds have a higher interest rate, since it is more likely that they won’t pay back on time and lenders need to charge a higher rate to make up for potential losses.

Exchange-traded Funds (ETFs)

An ETF is a way to easily invest in multiple companies at once that usually focuses on a theme like “the car industry”. You pay a small fee to a company that monitors the performance of the ETF and researches the industry or region the ETF is focused on.